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A Level Economics > 3. Price Determination In A Competetive Market > Flashcards

3. Price Determination In A Competetive Market Flashcards

1
Q

What is a market?

A

A voluntary meeting of buyers and sellers with an exchange taking place

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2
Q

What is demand

A

The quantity of a good or service that consumers are willing and able to buy at a given price in a given period of time.

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3
Q

What is supply?

A

The quantity of a good or service that producers are willing and able to sell at a given price in a given period of time

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4
Q

What is a competitive market?

A

A market where there are a large number of buyers and sellers all passively accepting the ruling market price. They lack entry and exit barriers.

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5
Q

What is the ruling market price ?

A

The price at which planned demand equals planned supply

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6
Q

What is effective demand?

A

Desire for a good or service backed by an ability to pay

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7
Q

What does a demand curve show?

A

The relationship between the price of a good or service and quantity of a good or service

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8
Q

What is market demand?

A

The quantity of a good or service that all the consumers in a market are willing and able to pay for

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9
Q

What is Individual demand?

A

Effective demand of an individual or particular consumer

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10
Q

What are the main conditions of demand?

A
  • price of substitute goods
  • price of complementary goods
  • personal income
  • tastes and preferences
  • population size
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11
Q

Events that might cause a rightward shift of a demand curve

A
  • an increase in price of a substitute good
  • a fall in the price of a complementary goods
  • increase in disposable income
  • advertising
  • increase in population
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12
Q

What is a substitute good?

A

Alternative goods that could be used for the same purpose

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13
Q

What is a complementary goods ?

A

Complemented with joint demand

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14
Q

What is a normal good?

A

A good for which demand increases as income rises

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15
Q

What is an inferior good?

A

A good for which demand decreases as income rises

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16
Q

What is elasticity?

A

The responsiveness of a change in the price of good to the demand of a good.

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17
Q

How do you work price elasticity of demand?

A

Percentage change in quantity demanded / percentage change in price

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18
Q

How do you work out the income elasticity of demand?

A

Percentage change in quantity demanded / percentage change in income

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19
Q

How do you work out cross elasticity of demand ?

A

Percentage change in quantity of A demanded / percentage change in price of B

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20
Q

What is price elasticity of demand ?

A

Measure the extent to which the demand for a good changes in response to a change in the price of that good.

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21
Q

What does a horizontal demand curve mean?

A

It is infinitely or perfectly elastic

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22
Q

What does a vertical demand curve mean?

A

Completely inelastic

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23
Q

How does substitutability determine price elasticity of demand?

A

When a substitute exists for a product, consumers respond to a price rise by switching from the good to the substitute. When very close substitutes are available demand for the product is highly elastic

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24
Q

How do percentage of income affect price elasticity

A

Demand curves for goods or services on which households spend a large proportion of income tend to be more elastic than smaller items. This is because, for smaller items people hardly notice the change in price but big items such as new cars and holidays prices are recognised

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25
Q

How does the nature of the product affect elasticity ?

A

Demand for necessities is inelastic but demand for luxuries is elastic

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26
Q

How does time affect the price elasticity?

A

Demand is more elastic in the long run than in the short run because it takes time to respond

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27
Q

What is the short run?

A

The time period in which at least one factor of production is fixed

28
Q

What is the long run?

A

All factors of production are variable

29
Q

What is the general nature of elasticity?

A
  • if total consumer expenditure increases in response to price fall , demand is elastic
  • if total consumer expenditure decreases in response to price fall, demand is inelastic
  • if total consumer expenditure stays constant in response to price fall demand is neither elasticity or inelastic. Elasticity = unity
30
Q

What is income elasticity of demand?

A

Measures the extent to which the demand for a good changes in response to a change in income

31
Q

What happens when disposable income increases?

A

The demand curve shifts right for normal goods but left for inferior goods

32
Q

What is cross elasticity of demand ?

A

Measure the extent to which the demand for a good changes in response to a change in price of another good.

33
Q

Three possible demand relationships between goods

A
  • complementary goods (joint demand)
  • substitutes (competing demand)
  • absence of demand relationship
34
Q

What is market supply?

A

The quantity of a good or service that all the firms in a market plan to sell at given prices in a given period of time

35
Q

What is profit?

A

Difference between total sales revenue and total costs of production

36
Q

What is total revenue?

A

Money received from selling an output

37
Q

What are the conditions for supply?

A
  • costs of production
  • technical progress
  • taxes
  • subsidies
38
Q

What is the price elasticity of supply?

A

Measures the extent to which the supply of a good changes in response to a change of the price of that good.

39
Q

Formula for price elasticity of supply

A

Percentage change in quantity supplied / percentage change in price

40
Q

What does it mean if the supply curve intersects the price axis?

A

The curve is elastic at all point though elasticity decreases the further up the line towards unity

41
Q

What does it mean if the supply curve intersects the quantity axis?

A

The curve is inelastic at all points but elasticity rises towards unity as you move up the curve

42
Q

What does it mean if the supply curve passes through the origin?

A

Elasticity equals unity at all points on the line

43
Q

How does the length of the production period affect price elasticity of supply?

A

If firms can convert raw materials into finished goods very quickly then supply will tend to be more elastic

44
Q

How does the availability of spare capacity affect supply?

A

When a firm possesses spare capacity and if labour and raw materials are readily available, production can generally be increased quickly in the short run.

45
Q

How does the ease of accumulating stock affect supply?

A

When stock of finished goods can be stored at low costs, firms can respond to sudden increases of demand. Alternatively, if the price of product falls the firm can place emphasis on stock accumulation rather than sales

46
Q

How can the ease of switching between alternative methods of production?

A

When firms can quickly alter the way they produce goods eg by switching between capital and labour, supply tends to be more elastic than when there is little or no choice. Similarly if firms can switch the raw materials they use

47
Q

How can the number of firms in a market and the ease of entering a market affect supply?

A

The more firms and greater ease means a greater elasticity of supply

48
Q

How does time affect supply?

A

Demand is more elastic in the long run because it takes time to respond

49
Q

What is market period supply?

A

When surprised by a sudden increase in demand, firms cannot immediately increase output. In the market period supply is completely inelastic.

50
Q

What is short run supply?

A

Higher prices creates an incentive to increase output as higher profits. In the short run, firms increase output by hiring more variable factors of production. The short run supply curve is more elastic than the market period supply curve.

51
Q

What is long run supply?

A

If firms believe the increase in demand will be long lasting, they may increase the scale of production by employing more capital and other factors of production. This is more elastic than short run.

52
Q

Elasticity of supply in competitive industry

A

Elasticity of supply is greater in the long run than the short run because in the long run firms can enter or leave the market

53
Q

What is equilibrium?

A

A state of rest or balance between opposing forces

54
Q

What is disequilibrium?

A

A situation in which opposing forces are out of balance

55
Q

What is market equilibrium?

A

A market is in equilibrium when planned demand equals planned supply where the demand curve crosses the supply curve

56
Q

What is market disequilibrium?

A

Exists at any price other than the equilibrium price

57
Q

What is excess supply ?

A

When firms wish to sell more than consumers wish to buy, with the price above the equilibrium price

58
Q

What is excess demand?

A

When consumers wish to buy more than firms wish to sell, below the equilibrium price

59
Q

What is joint supply?

A

When one good is produced , another good is also produced from the same raw material such as a by product. A rise in the price of the first good leads to a shift of the supply curve of the other good.

60
Q

What is joint demand?

A

A decrease in the price of a good will increase demand for that good and the good that it is in joint demand with

61
Q

What is composite demand?

A

Demand for a good with more than one use. An increase in demand for one use reduces the supply for an alternate use . Eg food and biofuel

62
Q

What is derived demand?

A

Demand for a good or factor of production wanted not for its own sake but as a consequence of the demand for something else

63
Q

Why are agricultural markets prone to disequilibrium and random shifts in the supply curve?

A

Climatic

64
Q

Problems faced by agricultural markets

A
  • long run trend for agricultural prices to fall relative to those of manufactured goods
  • prices have fluctuated considerably from year to year
65
Q

Why has the demand for agricultural products shifted to the right?

A

Caused by rising income and population growth while improved methods of farming have increased supply. But for many agricultural products the shift in supply has exceeded the shift in demand leading to a lower equilibrium.

66
Q

What has caused price volatility in the agricultural market?

A

Caused by random shifts of the short run supply curve in response to fluctuations in the harvest. Good harvests and bad harvests control the position

A Level Economics (7 decks)

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